Total: Focusing On Liquefied Natural Gas

| About: TOTAL S.A. (TOT)

Recently, Total (NYSE:TOT) made the final investment decision to develop the Yamal liquefied natural gas, or LNG, project in Russia to increase the production of its natural gas output. Total has a share of around 20% in this project with Novatek (OTC:NOVKY), with China National Petroleum Corporation, or CNPC, owning the rest. The Yamal project will develop the South-Tambeyskoye fields in Yamal peninsula for the production of natural gas and condensate. The depth of the field varies between 900 meters to 2,850 meters with an estimated gas reserve of around 481.4 billion cubic meters, or bcm, and 13.4 million tons of proved liquid hydrocarbons. The aggregate of proved and probable reserve in the Yamal region is expected to be around 800 million barrels of oil equivalent, or mboe, providing huge future natural resource potential. The development plan of the project includes the drilling of around 200 wells at 19 well pads, construction of a gas-gathering pipeline system, gas treatment facilities, and a liquefaction plant. So far, eight production wells have been drilled in the region to extract natural gas and natural gas liquids. The Yamal LNG consists of three liquefaction plants with a capacity of around 16.5 million tons per annum, or mtpa. Commissioning of the first LNG train is expected in 2016, with first production to start by 2017. At peak production the project plans to produce around 90,000 barrels of oil equivalent per day, or boepd.

The Yamal project is also attractive in terms of cost of production. The specific unit cost of production from the Yamal LNG is around $1,640 per ton. This cost is a metric of a firm's production cost and reflects cost-effectiveness. Compared to the Yamal project, the specific unit production cost for the Gazprom-operated Sakhalin-II project (another LNG project) is around $2,290 per ton. This cost advantage will help companies involved in the Yamal LNG project realize better margins compared to other LNG projects. In addition to the cost advantage, the Yamal project also has tax breaks on mineral extraction. These tax breaks are valid until 2020 or for a cumulative output of 250 billion cubic meters of gas and 20 million tons of gas condensate.

In addition to development of the Yamal project, the Russian export market for LNG is improving. The upper house of the Russian parliament and the Russian president have approved legislation, which would enable natural gas players other than Gazprom to export LNG via sea route. This law was brought into effect to increase the share of Russian natural gas from around 4.5% in 2013 to around 9% in 2020, and encourage other LNG players to export natural gas. The Yamal LNG project has contracted around 16 ice class LNG carriers, which will be used for year-round transportation of LNG produced from the project.

More LNG in Papua New Guinea

Total also bought natural gas assets in Papua New Guinea. InterOil (NYSE:IOC) agreed to sell around 61.3% in the Petroleum Retention License 15, or PRL15, which includes the Elk and Antelope gas fields to Total. The deal would give Total the right to explore in these blocks. InterOil will have a stake of around 38.7% of the project development. This deal would provide InterOil with an upfront payment of $613 million expected in the first quarter of 2014 and a further payment of $112 million after a final investment decision, or FID, is made. The Elk and Antelope have around 3.1 trillion cubic feet, or tcf to 15.7 tcf, of gas in place out of which around 2.5 tcf to 11.3 tcf is recoverable. This huge reserve gives both operators of the project huge gas reserves to support production growth. This acquisition of stake in PRL15 by Total in Papua New Guinea follows the purchase of stakes (between 35% and 50%) in five oil blocks from Oil Search in 2012. This indicates Total's interest for building productive assets in this country and would also bring the company closer to the Asian markets of South Korea, China and Japan where the demand for natural gas is high.

Japan's demand is around a third of the worldwide natural gas demand while South Korea is the second largest importer of natural gas after Japan. Similarly, Chinese demand for imported natural gas is estimated to exceed more than 35% by 2015, providing a major opportunity to natural gas importers. This opportunity from the Asian market is leading to the development of the Papua New Guinea LNG, or PNGLNG, project by Exxon Mobil (NYSE:XOM). The PNGLNG is the other major LNG production facility and is expected to start by 2014, with major supplies headed to the Asian markets in Japan, China and Taiwan.

Natural gas leading the way

Total's foray into large natural-gas projects shows the company's strong focus on production growth from natural gas. The Yamal LNG project with its large reserves and attractive cost structure is expected to help Total grow strongly in the coming quarters. In addition to natural-gas reserves this project has cost and tax advantages that will likely generate healthy margins for Total and its partners. The company's stake in Papua New Guinea's natural gas assets is likely to provide a lot of resource potential especially in natural gas. Additionally, this project will bring Total near the large Asian markets where demand for natural gas is expected to rise.

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